Real Money

Alcatel-Lucent's Cost-Cutting Strategy Will Fail

Cutting costs only looks good on paper.

NEW YORK ( TheStreet) -- Turning around the fortunes of a chronically struggling company is never easy. It becomes almost impossible when your rivals are operating with pinpoint execution.

When you're drowning in poor fundamentals with seemingly no lifeline, the term "sink or swim" becomes more defined. But you have to know which option is better.

This pretty much sums up the current status of Alcatel-Lucent ( ALU) and the decisions that are being made by CEO Michel Combes, who seems intent on going "back to the basics" and cutting costs. While I won't disagree there is merit in shoring up ALU's balance sheet, I just don't believe these are the right moves at this point in time.

Combes plans to sell 1 billion euros, which equates to $1.3 billion worth of assets, while cutting costs by an additional 1 billion euros. Investors cheered this decision, sending the stock up more than 7%.

Let's not get carried away just yet. Granted, the company has struggled for some time. But I believe these decisions are discounting Alcatel-Lucent's solid market position and some key assets. To that end, management's plans to harvest ALU's value could be a Trojan horse.

Combes has outlined a three-year plan of execution, upon which he said the company will have positive free cash flow and become "more tightly focused" on its core business. That's all well and good. But let's not forget there's negative precedent here as well. Combes' predecessor tried this strategy before and it failed miserably. What's going to change this time in a more competitive space?

In the last attempt, the end result was, among other things, a scattered operation, missed product launches and a slew of other execution blunders, which only further weakened ALU's position. Worse, this allowed rivals including Ciena ( CIEN) and Cisco ( CSCO) to seize control of ALU's once-dominant business, sending ALU spiraling into an endless abyss of struggles with liquidity.

Come to think of it, ALU has not had positive free cash flow since 2006. Fiscal awareness has only been a small part of the issue. The major problem has been a gross lack of execution. Cutting costs today, although it looks good on paper, doesn't address how the company is going to acquire more business and generate revenue growth. With no revenue, there are no profits. Without profits, where's the shareholder value?